321Class08-SML%26CAPM - The SML CAPM Efficient Portfolios...

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Efficient Portfolios Risk Beta
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Measuring Market Risk: β Β = Beta The correlation of a single stock relative to rest of stock market Beta reflects a single stock SD m i i , ρ β⇒ m m i i 2 , σ β=
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Alpha Measurement of stock price change with no change in the market
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Efficient Market Portfolio
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The Security Market Line
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Efficient Market Portfolio
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Efficient Market Portfolio
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Efficient Portfolio with R f
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Indifference Curves
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Indifference Curves and Efficient Portfolios
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The Security Market Line
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Security Market Line (SML)
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Changes in Risk affect the SML
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Capital Asset Pricing Model Assumptions: Risk free rate is nominal return Investors want high return + low risk Efficient portfolios No transaction costs All information homogeneous Beta is consistent over time Investors view a single investment
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CAPM Evidence
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321Class08-SML%26CAPM - The SML CAPM Efficient Portfolios...

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